Value Investing-Growing My Money Tree

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Thursday, November 20, 2014

Firstly, this is a major and important topic in value investing. You can definitely do a PhD on this. Think about it, if you know the exact amount how much something is worth, and someone is selling it to you way below this value, you will be interested, wont you? at least you would check it out.

For example, If you know, the IPhone 6 is selling at RM2000, and we all know, it's price is very much controlled, then your best friend came up to you with a genuine brand new phone and offers you at RM1500 for what ever reason. You bet you are interested (if you are not, pass me the phone!)

Another example, if you are staying in Bandar Utama and you know the houses in your area are worth RM 1 million. All your Neighbors either bought at this price or sold at around this price recently. If the house next door hangs a "for sale" notice., when you ring up the Australia migrated owner, he says he wants to sell at RM 2million! Why? because he personally decorated the house before moving to Australia 2 years ago! You probably would ask him to fly kite albeit a polite manner.

Similarly, if you know the value of a particular stock, and it's price is below this, you should be interested.

However, calculating a public listed company's intrinsic value is not that simple nor straight forward. It is a bit of science with a bit of art in it. One reason for this is the future. Very often, we make a investment looking forward for the future returns. Hence we would need to take assumptions with regards to the future earnings into the picture. We all know how certain the future is. I believe you have came across this quote :

"The only certainty is nothing is certain.."

Having said that, there are many methodology in the stock investment circle for finding intrinsic value. Famous investors such as uncle Warren said "Price is what you pay and value is what you get". His sifu, Benjamin Graham, also said "only buy when it is at least 20% below intrinsic value". So you can imagine the important of understanding the meaning of value.

So it is worth while to understand how to find the intrinsic value of public listed company,

Before, you read on, you might want to know that I am not an expert in this. What i am writing here is from a lay persons view and what works for me. Please understand, the "only way" to deduce value...NONE. Even the experts are arguing over this.

The most popular method by most value investor is the Discounted Cash Flow (DCF). However, I have chosen Earning Power Value as my base to value companies that come to my attention. Why?

One of the known weak point of DCF is that assumption has to be made for future earnings of a company. It is difficult enough to estimate the earnings of next financial year let alone 10 years down the road. The end value is very much depends on the accuracy of your prediction. A small fraction of assumption deviation will end up with huge difference at the end value

Earning Power Value (EPV), does away with this troubling assumption.
I first came across this concept from the following book written by, Bruce CN Greenwald. a professor of finance at Columbia University Graduate school of Business.

This is one of those book you will read if you can't sleep at night..well maybe slightly better then Benjahim Grahams intelligent investor.. a dry read but valuable read none the less.

In this book, he also argues the difficulty in earnings assumption for Discounted cash flow model. Hence he introduce the concept of Earning power Value.

I would very much encourage you to read the book to fully understand the whole concept. (I find my self keep going back to the book whenever I have doubt on my calculation). What I share here is a summary of some sort from my own understanding.

Firstly, the formula of Intrinsic Value:

IV = EPV + Growth

2ndly, formula for EPV

EPV= Earnings

Cost of capital.

Earnings:

Only core earnings or earnings from normal business activities. Important to remove earnings which is not from the core business or one off items.

Cost of Capital:

The interest charge on capital borrowed to do business. The Author recommends to use at least 2 times of the risk free rate. His examples were mainly using 10%

In the book he did not explain how he concluded the formula but, if you re-arrange the formula:

Earnings = EPV x Cost of Capital

This seem to be similar to our normal FD earning Formula:

Earnings = Capital x interest rate

the way I understood it is this: If I am earning RM1000 from a investment and I had borrowed the Capital at interest rate of 10%, how much is this investment's capability to make earning in equivalent to capital kept at FD with the same interest rate. EPV=RM1000/10= RM10000. So the value of this company, equivalent to cash in FD with a interest rate of 10% is RM10000

Tha Author has suggested, To drop growth from the equation and take growth as a margin of safety. Meaning if a company is trading at its EPV alone, yet a growth can be expected then it is already safe to buy at that price.

In a case study of WD40, the Author went on to use the final IV formula:

IV= EPV + Net Cash

His rational seems to mean: in a running business that you are taking over, any cash in the company is at you disposal. So the intrinsic value of a running company should be the capability of the company to earn money (Which is the EPV portion) + Net cash ( + growth but this is used as margin of safety)

For my own personal use, I have made some modification to the formula. Instead of Net cash, I replaced it with Liquidated asset value. Which is the Net asset value in situation if the company is liquidated. My reason is when i buy a company, I am buying the assets and earning capabilities, if I made a mistake in valuing its earning capabilities, worst case scenario I should be able to sell the assets and take back some money invested. So my formula is:

IV = EPV + Net Asset for liquidation.

Like any Intrinsic value model, the final figure comes with many assumptions. Although, this model tries to reduce the need for many assumptions, it still depends on some assumptions. When using this formula it is important to remember it is a guide and not a definite figure.

Wednesday, November 19, 2014

On 28 August 2014, We wrote an article introducing Icapital.Biz, the only closed end fund listed on Bursa. We believe it is undervalued about 20%. We also wrote why it is time to buy, reasons among other was the undervaluation, good management and a dual listing plan to close the Discount Gap.

Are these still valid?

as of 13 nov 2014, its NAV is RM3.03 while its Market price as of 19/11/2014 was RM 2.4. A 20.7% discount still exists.
Secondly, is the Dual listing still on?

The Fund Manager has been running all over Malaysia, updating the status of the dual listing. (Well actually, it was also a roadshow to encourage share owners to attend the upcoming EGM to re-elect a particular director..that is story for another article.) below are new information provided:

What new information do we have?1. The Dual listed fund is actually a separate fund from Icapital.Biz2. It will be quoted in USD3. The 2nd listed country (beside Bursa) is a country without capital gains tax. The fund manager (Capital Dynamics Asset Management SB) has offices in KL, Singapore, Hong Kong, Australia and Shanghai. This rules out Australia as country of listing as it has capital gains tax in placed.4. The IPO will try to raise USD100 million as fund size.5. It is in the Due diligence stage and should be ready by 1H 2015. 6. It comes with a free warrant with every 5 shares subscribed and the strike price is tied to its NAV.7. Any shares bought or subscribed in Malaysia (which will be in USD) can be transferred to the 2nd listing country. (the fund manager claims this makes it a legal avenue for one to send ones fund oversea)8. It will be a global fund with a mandate to invest in 42 countries.

The Fund manager, stresses that the fundamental reason for this is to benefit the share owners, presumably to handle the NAV gap in Icapital.Biz. however he is tight lip on how does a 2nd fund solves the issue. He claim any information of this sort might seen as market manipulation with insider information.

If this is the case, then it is more important for us to study how it might benefit Icapital.Biz share owners. If the NAV to price gap is closed or narrowed we are sitting on a possible of 26% gain (Assuming we buy at RM2.4 and it rises to its NAV at RM3.03)

We speculate, Icapital.Biz with its cash of about RM250 million or USD74.5 million will subscribed to the new fund and will distribute all the shares it subscribed together with its new warrants to Icapital.Biz share owners as dividend in specie.

Tuesday, September 2, 2014

We predicted Maybulks Q2 result and market price would not be favorable sighting the BDI and Price divergence as the reason. (Click: Price-BDI divergence) Has this come true?

We believe so. Lets look at it's core Business earnings. As anticipated, the core dry bulk earning has reduced 18.5% in tandem with the 30% QoQ drop in BDI (exclude capsize). This is also inline of our observation that earnings are almost always lags behind BDI figure 1-2 quarters.

Lets look at the market price. Maybulk's price has dropped from RM1.88 when we last wrote to the current price of RM1.69, a 10% drop. This reduction is still not as significant. we recall when the BDI was at the lowest of 650, Maybulk was at RM1.30.

It only experience a 10% drop in price when not only BDI has came down, but also contribution from POSH dropped significantly sighting challenges in Mexico as the reason.

Again we ask the same question, is this price sustainable?

As always, We are interested in Maybulk's Dry bulk business, so it is obvious we should keep an eye at BDI index.

From Chart 1, the BDI (ex-capsize) in Q2 is lower then Q1. Since, Dry Bulk revenue lags behind, we can expect the coming Q3 result will be poor as well.

we are now 2 months into Q3, and the index has rebounded from its low. Worth to continue monitoring the BDI.

Inline with the take away from the AGM, (AGM take away) we will be monitoring the scraping and deliveries of fleet around the world.

According to RS Platou, a leading marine information provider, the fleet expansion for this year is expected to be around 5-6% which is lower then expected demand of 7-8%. If this is true then, BDI is expected to rise as supply is lower then demand.

Past year records:

In 2013, fleet has expended by 8%, YTD, is 4.6%. If this stays it course, while demand remain steady, BDI is expected to rise further. We have not seen significant rise in scrapping rate yet.

In a nut shell, it is a closed end fund and the fund manager is Mr.Tan Teng Boo. Its investing philosophy is by Value Investing. The company invests in shares of public listed company and makes profits either by selling it back or by receiving dividend from them.

The general difference between a open ended fund (aka-unit trust) is, its unit size is fixed. Unlike unit trust, you don't subscribe to this fund from a agent. the only way you may own it, is by buying from someone else from the stock market just like buying Public Bank shares or Genting Berhad.

The other benefit of a closed end fund is, the fund manager can really do what he do best, buying a sound company at a good price and selling them only when he thinks it is over valued. He is not tied up with changing fund size.

unlike a unit trust fund manager, who has to sell at market price when many people redeems, in order to repay them. He has to buy at market price when people invest in his fund as he is mandated to only keep about 20-30% cash.

Historical, most people would invest in unit trust when the share market is on a Bull run, when prices are high, when do they sell? Yup, during a market crash...forcing the fund manager to sell at a low price...

Buy High sell Low is not going to make you money! It is not a secrete 80% of unit trust do not very well.

There are many other benefits of a close end fund vs open ended fund which are discussed in many other websites. We wont be discussing it here. Please Google for more information. one place to start is here : CEF vs UTF

Current state of things at Icapital.biz

NAV- net asset value per share of Icap is arround RM3.09 yet its market price is RM2.45 (as of 28/8/2014) which is about 20.7% discount. The company announces its NAV every Thursday after 5pm.

Below is taken from its latest quarterly report:

The entire portfolio is worth RM428million and has about RM185 million in investments (shares), and RM240million in short term deposits and bank. Which means it has 56% in cash and 44% in Shares. The various company it has invested in, is as shown in diagram 1, Which really means your buying Padini for more then 40% discount if you buy the entire portfolio.

However, we are not buying the entire portfolio, so we wont have access to the cash. What is the benefit then?

Why invest now?

1. One of the key element in Value investing is to look for sound companies and buy them cheap. At current prices, it is undervalued. At one point in 2008, you have to pay a premium to own it! Now you are buying with a discount.

2.It is run by experience manager. Mr.Tan Teng Boo is known fondly by his followers as "Warren Buffet of Malaysia". If you are not familiar with stock market but want to expose to it, yet you hate the charges by unit trust, this is the counter you want to have.

3.It is a known fact that, the company is trying to close the NAV-price discount gap. One way to achieve this, They announced in 2012, is by going for a dual listing. Meaning, this counter will be listed in another country as well.

Where will it be dual listed? They have not announced, but last year, during AGM, a share owner asked "how much are we spending for this exercise?", Mr.Tan said "a couple million of HongKong Dollar". and recently they also opened a Hong Kong office. I believe the targeted listing will be on Hang Seng. Interestingly in the latest Annual report he wrote this:

out of a blue he mention about EGM...the last EGM was in 2009 and that EGM was to vote if it could invest in overseas. Share holders was advise against it then, sighting the reason as it's fund size was too small then.

It's fund size has double since 2009. Will this be revisited? My take is, likely they will dual list in Hong Kong and use the cash it has now to invest in Hong Kong.

If this does materialize, I am sure it will attract a lot of attention. As a share owner this is a good thing especially if you believe in the China growth story. By then, hopefully, the discount will turn to premium.

The ugly part of Icapital.biz

1. For starters Mr.Tan Teng Boo is a "firery" figure. He would say what he thinks on your face irrespective if you will like it or not. He has been heavy criticizing the government for the country's policy. With this, you can forget about the government funds investing here...and Icapital.biz is about him making the shots. So you are expose to his good and ugly.

2.Will the discount gap be close? no one knows. If the market crashes, its holding will reduce in price so does its NAV. However, since it is holding more cash, Its NAV will reduce slower then the overall market. The discount gap might actually increase.

3.Holding too much cash is a double edge sword. If market crashes, your are safe. However, If the market goes for another round of Bull run..you wont be in to ride the wave.

4.This is a fund... so you can be pretty sure none of the brokerage houses are covering it. So no one to make a "call" rating...exposure is low, short term no excitement.

Friday, July 18, 2014

A quick look at Maybulk's Stock Price, It is making a rebound from the low of RM1.73 at the beginning of June. Is this rebound sustainable?

Looking at the Dry Bulk Index below, the answer seems to point to NO. The index is very near to its all time low of 651 at the beginning of 2012. It will be a reminder that Maybulk's price was also near to its all time low then. Perhaps, the coming quarterly results might show some improvement YoY, but I doubt QoQ will see drastic improvement on its core Dry Bulk business.

Wednesday, June 4, 2014

Maybulk's AGM was held on the 23th of May at the KLGCC, below are summary of what I could take away.

1. As stated in the annual report, due to unexpected vessel buying by Private Equity funds in a big way, turn around for charter rates is expected to be delayed. Additional information not found in the annual report regarding the recovery is: The board is expecting recovery in 18-24 months. This perhaps provide a time frame for investor. (To recap, middle of 2013, the board anticipated a supply shortage in the coming years due to closing down of many shipping companies. This is brought about by very low charter rates. Banks are unwilling to fund new vessel purchases. New vessel price has dropped to a all time low. The board, took the opportunity and ordered new vessel. However, Private equity funds, with it's cheap money due to QE, started to jump into buying new vessel as well. Supply of vessel are expected to increase while pushing down charter rates again.)

2. POSH, as reported in almost all media and annalists, POSH is Maybulk's savior. we all know that. In this AGM, during a private chat, Mr.Kuok, the CEO, expects POSH to 'fly' come 2015 with the confirmation of the Accommodation vessel charters. Maybulk's Chairman and another director Mr.Teo is on the board of POSH. the most recent quarter report, POSH contributed RM25million in 2014 Q1, while 2013 Q4 was 8 million.

3. Mr.Teo Joo Kim, a current Executive Director and the previous Executive Chairmen, gave many more insights and business information compared to any other directors. Things that he highlighted:

b.The key sign and worth monitoring as an indicator for recovery is the up tick of ship scraping. he recons, since private equity funds are not ship industry guys, they are in for the quick bucks. If the charter rates remains low, they might give up and head the exit. If they can't find buyers for the vessels, or other smaller shippers cant survive, scrapping is the only solution.

c.He strongly believe, BDI of 500-600 as was seen in 2013 will be lowest.

d.All vessels (2014 maybulk has 24 vessels) are fully booked for the year. (The problem is the rates are low, hence poor profits. The vessels directly own are making profit, the jointly owns are the one dragging down the overall numbers.) Maybulk, has strong affiliation with its customers, no problem in chartering its vessels.

4. Mr.Kuok Khoon Kuan, CEO after the AGM was also available to share some of his take when I spoke with him:

a. India might provide a bright spot. So it pays to watch out for India's import/export of commodity.

b. Although iron ore import into China has slowed, but coal export has picked up as it exports cheaper coal to around the world.

c. No major capex moving forward.

All in all, one can sense the unhappiness of some share holders while some are hard core fans. The tone of the Board is also some what cautious. 2014 will be a quiet year for Maybulk.

However, undoubtedly, this guys really know their turf. They kept ample amount of cash when they made huge pile of it. Invested in a subsidiary when things started to look bad, then went on to buy vessels almost at the lowest price when USD was still low. They also sent vessels for early dry docking when the rate were very low in anticipation of maximizing charter days with rebound in rates.

Thursday, April 24, 2014

During the recent AGM, the Board Chairman revealed that the sell and least back for the properties own by Notion is on going. He added, In a very cheeky way, it will be "rewarding" to share holders....I am speculating for a special dividend.

How much can Notion gain from this recent activity? More importantly, if they do pay out, how much can they pay out?

The above table is collected form the 2013 annual report (The Thailand property is excluded)

A quick check with real estate agent web sites, the current asking price for property around the area is RM160-350

1.These are asking price not transacted price. I will assume RM200 and RM160 as generally property around Klang valley has appreciated about 3-4 times since 2008. looking at the Jalan Sungai Binjai factory bought in 2008, this seems to be reasonable.

2.Assuming reported sq ft is for land size. It is not mention the sq ft quoted is the build up or land size. But a OSK report in 2009 seems to point this as land sizes.

3. The chairmen also say Notion will keep 2 years worth of rental as precaution. How much will this be? As a rule of thumb, rental yield is about 3-6% currently depending type, area etc. I will assume, who ever buys this properties will make 5% rental yield.

4.Talking to the financial controller during AGM, it is also known that they will keep further portion of the proceed for other investments if it comes up. How much will they keep? I am assuming 50%.

The stock price is hovering arround RM0.65 to RM0.6, if we take the mean of RM0.63, a dividend of RM0.19 and RM0.13 will give a dividend yield of 30% and 20% respectively. If we take a further 20% discount as margin of error on the speculated RM0.13 dividend, resulting a RM0.10 dividen which still gives 16.5% dividend yield.

My guest, it will be at the range of RM0.10 to RM0.15.

Will this excite the market? I have no idea.

But this exercise will surely make the financial book very impressive, reduce liabilities, increased cash.

Yet, the fact that DSL camera market is still weak base on Nikon's latest quarter report announced few days ago. Western Digital is about to announce results on 30 April 2014. This year look set to remain a flattish earnings.